Zero lower bound

The Zero Lower Bound ( ZLB ) or Zero Nominal Lower Bound ( ZNLB ) is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the capacity of the central bank to stimulate Economic growth.

The root cause of the ZLB is the issuance of money by governments, effectively guaranteeing a zero nominal interest rate and acting as an interest rate. Governments can not encourage spending by lowering interest rates, because people would simply hold cash instead. Miles Kimball suggéré That a modern economy Either fully Relying on electronic money or electronic money as defining the unit of account Could Eliminate the ZLB . [1]

The problem of the ZLB, which has returned to prominence with Japan’s experience during the 90’s , and more recently with the subprime crisis . Paul Krugman , Gauti Eggertsson , and Michael Woodford among others. The belief that monetary policy under the ZLB was effective in promoting economic growth was criticized by Paul Krugman .

Milton Friedman , on the other hand, argued that a zero nominal interest rate presents no problem for monetary policy. According to Friedman, a central bank can increase the monetary base even if the interest rate vanishes; It only needs to continue buying bonds. [2] Friedman also coined the term “helicopter drops” to illustrate how central banks could always generate spending and inflation. Friedman used the example of a helicopter flying over a town dropping dollar bills from the sky, which households then gathered in perfectly equal shares. Economists have argued that real-world versions of this idea would work at the zero lower bound. Typically, helicopter drops have been interpreted as involving the central bank directly financing the budget deficit. [3]

The economist Willem Buiter has argued that helicopter drops can always raise demand and inflation. [4] Following the repeated struggles of the European Central Bank to revive the eurozone economy and meet its inflation objective, a number of economists have taken a more literal interpretation of Friedman’s parable and suggested that the European Central Bank should transfer cash directly to households. [5] [6] [7]